10-Q 1 c72858e10vq.txt FORM 10-Q FOR QUARTER ENDING SEPTEMBER 30, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSION PERIOD FROM _____ TO _____. COMMISSION FILE NUMBER 333-84486 PURINA MILLS, LLC (Exact name of Registrant as specified in its charter) DELAWARE 41-2015534 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1080 COUNTY ROAD F ARDEN HILLS, MINNESOTA 55112 (Address of principal executive offices and zip code) (651) 481-4700 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] TABLE OF CONTENTS

2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PURINA MILLS, LLC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements. 3 PURINA MILLS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements. 4 PURINA MILLS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements. 5 PURINA MILLS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ IN THOUSANDS IN TABLES) (UNAUDITED) 1. BASIS OF PRESENTATION On October 11, 2001, pursuant to an Agreement and Plan of Merger, LOL Holdings III, Inc., an indirect wholly-owned subsidiary of Land O'Lakes, Inc. was merged into Purina Mills, Inc. ("PMI"), with PMI being the surviving corporation. As a result of the merger, LOL Holdings II, Inc., a wholly-owned subsidiary of Land O'Lakes, Inc. owned 100% of PMI. Subsequently, PMI was reorganized as a limited liability company, renamed Purina Mills, LLC ("Purina Mills") and LOL Holdings II, Inc. contributed the business to Land O'Lakes Farmland Feed LLC. Upon the formation of Purina Mills, provisions for income taxes were no longer recorded since the taxable operations pass directly to the owner. The merger has been accounted for as a purchase transaction in accordance with Statement of Financial Accounting Standards No. 141 ("SFAS 141") and, accordingly, the consolidated financial statements for periods subsequent to October 11, 2001 reflect the purchase price, including transaction costs, allocated to tangible and intangible assets acquired and liabilities assumed, based on their estimated fair value as of October 11, 2001. The consolidated financial statements for periods prior to October 11, 2001 have been prepared on the predecessor cost basis of Purina Mills, LLC. 2. SIGNIFICANT ACCOUNTING POLICIES The unaudited consolidated financial statements reflect, in the opinion of the management of Purina Mills, LLC (the "Company"), all normal recurring adjustments necessary for a fair statement of the financial position and results of operations and cash flows for the interim periods. The statements are condensed and, therefore do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Additionally, certain reclassifications have been made to prior period consolidated statements to conform to the consolidated financial statement presentation as of and for the nine months ended September 30, 2002. The results of operations and cash flows for interim periods are not necessarily indicative of results for a full year. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." Major provisions of these statements are as follows: all business combinations must now use the purchase method of accounting, the pooling of interests method of accounting is now prohibited; intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as a part of a related contract, asset or liability; goodwill and intangible assets with indefinite lives are not amortized, but tested for impairment annually, except in certain circumstances, and whenever there is an impairment indicator; all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting. The Company adopted the provisions of SFAS 141 and certain provisions of SFAS 142 as of July 1, 2001, and the remaining provisions of SFAS 142 as of January 1, 2002. As required by SFAS 142, the Company performed step one of the impairment testing of goodwill by June 30, 2002. The fair value of goodwill exceeded the carrying amount, therefore the second step of impairment testing was not required and no impairment has been recognized in the current year of adoption. The Company will perform impairment tests annually and whenever events or circumstances occur indicating that goodwill or other intangible assets might be impaired. As of January 1, 2002, the Company is no longer amortizing goodwill, except for goodwill related to the acquisition of cooperatives and the formation of joint ventures.

6 3. GOODWILL AND OTHER INTANGIBLE ASSETS A summary of intangible assets follows:

The changes in the carrying amount of goodwill for the nine months ended September 30, 2002, are as follows: Balance as of January 1, 2002......................... $ 86,872 Reallocation of purchase price........................ 57,866 --------- Balance as of September 30, 2002...................... $ 144,738 =========

The reallocation of the purchase price was primarily the result of finalizing the appraisals during the third quarter ended September 30, 2002. The offsetting reduction to property, plant and equipment resulted in a $3.9 million adjustment to reduce depreciation expense, which was also recorded in the third quarter ended September 30, 2002. 4. RECEIVABLES A summary of receivables is as follows:

5. RECEIVABLES PURCHASE FACILITY In December 2001, Land O'Lakes, Inc., Land O'Lakes Farmland Feed LLC, and Purina Mills, LLC established a $100.0 million receivables purchase facility with CoBank, ACB (CoBank). A wholly owned unconsolidated special purpose entity, Land O'Lakes Farmland Feed SPV, LLC, (SPE), was established to purchase certain receivables from Land O'Lakes, Inc., Land O'Lakes Farmland Feed LLC, and Purina Mills, LLC. CoBank has been granted an interest in the receivables owned by the SPE. The transfers of the receivables from Purina Mills, LLC to the SPE are structured as sales and, accordingly, the receivables transferred to the SPE are not reflected in Purina Mills, LLC's consolidated balance sheet. However, Land O'Lakes, Inc., Land O'Lakes Farmland Feed LLC, and Purina Mills, LLC retain the credit risk related to the repayment of the notes receivable with the SPE, which in turn is dependent upon the credit risk of the SPE's receivables. Accordingly, Purina Mills, LLC has retained reserves for estimated losses. Purina Mills, LLC expects no significant gains or losses from the sale of the receivables. The total accounts receivable sold during the three months and nine months ended September 30, 2002 were $229.0 million and $687.4 million, respectively. 7 6. INVENTORIES A summary of inventories is as follows:

7. INVESTMENTS Purina Mills, LLC's investments are as follows:

8. PROPERTY, PLANT AND EQUIPMENT A summary of property, plant and equipment is as follows:

8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussions of financial condition and results of operations of Purina Mills, LLC (the Company) together with the financial statements and the notes to such statements included elsewhere in this Form 10-Q. This discussion contains forward-looking statements based on current expectations, assumptions, estimates and projections of the management of the Company. These forward-looking statements involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, as more fully described in the "Risk Factors" section and elsewhere in this Form 10-Q. We undertake no obligation to update publicly any forward-looking statements. OVERVIEW General The Company produces both commercial and lifestyle animal feed for a wide variety of animals, including dairy cattle, beef cattle, swine, poultry, horses and other specialty animals such as laboratory and zoo animals. Farmers and specialized livestock producers who derive income from the sale of milk, eggs, poultry and livestock use the Company's commercial feed products. Customers who own animals principally for non-commercial purposes use the Company's lifestyle feed products. The Company markets animal feed products, other than dog and cat food, under the leading brands in the industry, Purina, Chow and the "Checkerboard " Nine Square Logo. In October 2001, Land O'Lakes acquired Purina Mills, Inc. and contributed the business to Land O'Lakes Farmland Feed LLC. The total purchase price of Purina Mills, Inc. was $358.6 million. The acquisition added $86.9 million of goodwill and $98.9 million of other intangible assets to the balance sheet of Land O'Lakes Farmland Feed LLC, which was pushed down to the Company. Land O'Lakes Inc. financed the acquisition and refinanced outstanding indebtedness of Land O'Lakes, Inc. and the Company through a combination of secured bank revolving credit and term debt and the issuance of $350.0 million of unsecured senior notes due 2011. The Company and its wholly-owned domestic subsidiaries (other than LOL Farmland Feed SPV, LLC) have guaranteed this indebtedness and have secured that obligation with substantially all assets. Consolidated and Unconsolidated Businesses The Company has several business activities that are not wholly owned. The results of the majority and wholly-owned businesses are fully consolidated. The minority owners' share in these businesses is eliminated in the consolidated financial statements. Most of the investments in joint ventures in which the Company has 50% or less of the governance rights are accounted for under the equity method of accounting. For the nine months ended September 30, 2002, losses in unconsolidated businesses were $0.5 million compared to losses of $0.3 million for the nine months ended September 30, 2001. The investment in unconsolidated businesses as of September 30, 2002 was $8.1 million, compared to $9.3 million as of December 31, 2001. Cash flow from our investment in unconsolidated businesses for the nine months ended September 30, 2002 was $0.5 million compared to $1.2 million for the nine months ended September 30, 2001. Critical Accounting Policies The Company utilizes certain accounting measurements under applicable generally accepted accounting principles, which involve the exercise of management's judgment about subjective factors and estimates about the effect of matters, which are inherently uncertain. The following is a summary of those accounting measurements which the Company believes are most critical to the reported results of operations and financial condition. Inventory Valuation. Inventories are valued at the lower of cost or market. Cost is determined on an average cost basis. The Company's products use agricultural commodities as inputs; in particular corn, soybean meal, and wheat midds. Through pricing and the use of risk management tools, the results are marginally affected by the change in the cost of commodity inputs. Industry practices in animal feed pass cost fluctuations on to the customer in the long term, but do not protect against large sudden movements in input costs in the short term. 9 The Company uses derivative commodity instruments, primarily futures contracts, to reduce the exposure to changes in commodity prices primarily for product inputs such as soybean meal and corn. These contracts are not designated as hedges under Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." Accordingly, since the adoption of SFAS No. 133, effective January 1, 2001, the futures contracts are marked to market each month and unrealized gains and losses are recognized in earnings. Prior to 2001, the Company did not mark derivative commodity instruments to market; instead, the Company recorded losses or gains only when realized. Allowance for Doubtful Accounts. The Company estimates its allowance for doubtful accounts based on an analysis of specific accounts, an analysis of historical trends, payment and write-off histories, current sales levels and the state of the economy. The Company's credit risks are continually reviewed and management believes that adequate provisions have been made for doubtful accounts. However, unexpected changes in the financial strength of customers or changes in the state of the economy could result in write-offs which exceed estimates and negatively impact the financial results. Recoverability of Long-Lived Assets. The Company assesses the recoverability of goodwill and other long-lived assets annually or whenever events or changes in circumstances indicate that expected future undiscounted cash flows might not be sufficient to support the carrying amount of an asset. The Company deems an asset to be impaired if a forecast of undiscounted future operating cash flows is less than an asset's carrying amount. If an asset is determined to be impaired, the loss is measured as the amount by which the carrying value of the asset exceeds its fair value. Seasonality The feed business is seasonal, with a higher percentage of the feed volume sold, and earnings generated, during the first and fourth quarters of the year. This seasonality is driven largely by weather conditions that affect cattle product lines. If the weather is particularly cold and wet during the winter, sales of cattle feed increase as compared with normal seasonal patterns because the cattle are unable to graze under those conditions and have higher nutritional requirements. If the weather is relatively warm during the winter, sales of cattle feed may decrease as compared with normal seasonal patterns because the cattle may be better able to graze under the warmer conditions. Other product lines are affected marginally by seasonal conditions, but these conditions do not materially affect quarter-by-quarter results of operations. Agricultural Commodity Inputs and Outputs Many of the Company's products use agricultural commodities as inputs, such as corn, soybean meal, and wheat midds. Through pricing and the use of risk management tools, the Company's results are marginally affected by the change in the cost of commodity inputs. Industry practices in animal feed pass cost fluctuations on to the customer in the long term, but do not protect against large sudden movements in input costs in the short term. The Company follows industry standards for feed pricing. The feed industry generally prices products based on Income Over Ingredient Cost "(IOIC)" per ton of feed. This practice tends to mitigate the impact of volatility in commodity ingredient markets on animal feed profits. As ingredient costs fluctuate, the changes are generally passed on to customers through weekly or monthly changes in prices. Thus, the key indicator of business performance is IOIC rather than net sales. Net sales are considered a poor indicator of performance as large fluctuations can occur from period to period due to volatility in underlying commodity ingredient prices. The Company enters into forward contracts to supply feed, which currently represent approximately 20% of the feed output. When the Company enters into these contracts, it also generally enters into forward input supply contracts to "lock in" IOIC. Changes in commodity grain prices also have an impact on the mix of products that the Company sells. When grain prices are relatively high, the demand for complete feed rises since many livestock producers are also grain growers and will sell grain in the market and purchase complete feed as needed. When grain prices are relatively low, these producers will feed their grain to their livestock and purchase premixes and supplements to provide complete nutrition to their animals. These fluctuations in product mix generally have minimal effect on operating results. Complete feed has a far lower margin per ton than supplements and premixes. Thus, during periods of relatively high grain prices, although margins per ton are lower, the Company sells substantially more tonnage because the grain portion of complete feed makes up the majority of its weight. 10 RESULTS OF OPERATIONS The following discussion compares the results of operations for the three and nine month periods ended September 30, 2002 to the comparable three and nine month periods ended September 30, 2001, respectively. As a result of the merger and the application of SFAS 141, the financial statements for periods subsequent to October 11, 2001 are prepared on a different basis of accounting and are not comparable to the financial statements for periods prior to October 11, 2001. To facilitate an understanding of the Company's operating performance, the following discussion is presented on a traditional comparative basis for all periods, with specific explanation provided for changes in results of operations due to the effects of the application of SFAS 141. THREE MONTHS ENDED SEPTEMBER 30, 2002 AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2001 NET SALES Higher commodity prices caused net sales to increase $7.0 million, or 3.5%, from $198.5 million for the three months ended September 30, 2001 to $205.5 million for the three months ended September 30, 2002. Beef cattle volume decreased 10.6% from the 2001 period as sales volume in both the feedlot and grass cattle businesses were unfavorably affected by increases in commodity prices. Dairy cattle tons increased 5.4% over the prior year period due to a shift in sales to larger herds and a launch and repositioning of calf starters and milk replacers, which more than offset declines in sales to smaller herds discontinuing operations. Hog volume decreased 16.9% from the prior year as a result of continuing market consolidation, a decline in industry productivity, and an excess of food proteins (such as beef cattle, swine, and poultry) in the United States market. Poultry volume declined 53.0% due to an excess of food proteins in the United State market and a reduction of flock sizes to meet new animal welfare guidelines. Horse volume increased 11.2% over the 2001 period, resulting from continued market share growth in the horse product lines. Specialty and other lifestyle volumes increased 19.4% over the 2001 period due to sales volume increases in all sectors of the specialty and other lifestyle businesses, largely due to an increase in the private label business. COST OF SALES Cost of sales increased $8.2 million, or 5.1%, from $160.2 million for the three months ended September 30, 2001 to $168.4 million for the three months ended September 30, 2002, due primarily to increased ingredient costs. Manufacturing and distribution expenses were $3.1 million lower as a result of plant closures. SELLING, GENERAL AND ADMINISTRATION EXPENSE Selling, general and administration expense decreased $4.1 million, or 13.0%, from $31.5 million for the three months ended September 30, 2001 to $27.4 million for the three months ended September 30, 2002. The decrease is due primarily to a reduction in intangible amortization expense of $2.6 million as a result of the revaluation of assets at the time of the acquisition and the Company's adoption of SFAS No. 142 under which goodwill is no longer amortized. Other selling, general and administrative expenses decreased $1.5 million primarily as a result of reduced personnel costs achieved through the integration plan with Land O'Lakes Farmland Feed LLC. INTEREST (INCOME) EXPENSE As a result of the October 11, 2001 acquisition, all outstanding debt of the Company, exclusive of intercompany borrowings, was eliminated. Thus, for the third quarter of 2002, the Company incurred no interest expense, but rather received interest income of $0.3 million primarily due to the sale of receivables. For the three-month period ended September 30, 2001, the Company incurred interest expense of $2.9 million on outstanding debt. INCOME TAX BENEFIT Since the Company is now a limited liability company, it does not incur any income tax expense at the company level. In contrast, for the three months ended September 30, 2001, the Company recorded a tax expense of $2.4 million on its earnings before taxes. 11 NET EARNINGS Net earnings increased $8.8 million to $10.1 million for the three months ended September 30, 2002, compared to $1.3 million for the three months ended September 30, 2001. Slightly lower gross profit, due to higher ingredient costs, was more than offset by lower selling, general and administration expense, due to a reduction in amortization expense and integration efficiencies, by lower interest expense, and by the elimination of income tax expense. NINE MONTHS ENDED SEPTEMBER 30, 2002 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2001 NET SALES Net sales of $620.3 million for the nine months ended September 30, 2002 increased by $8.5 million, or 1.4%, as compared to net sales of $611.8 million for the nine months ended September 30, 2001. Overall volume was 2.8 million tons in the nine months ended September 30, 2002, representing a decline of 2.7% from the same period in the prior year. Gross profit was $109.8 million for the nine months ended September 30, 2002, a decrease of 3.3% from the nine months ended September 30, 2001. Average IOIC per ton was $74.53 for the current period compared to $75.34 for the nine-month period ended September 30, 2001. Beef cattle volume decreased 8.6% from the 2001 period due primarily to lower cattle markets, fewer animals and an excess of food proteins in the United States market. Dairy cattle tons increased 3.1% due to higher feeding rates in the 2002 period. Hog volume decreased 11.3% from the prior year as a result of market consolidation, small producers exiting the business, and the supply of protein exceeding demand. Horse volume increased 10.9% over the 2001 period due to marketing and product promotions. Specialty and other volume remained strong and increased 13.9% over the 2001 period, while poultry volume declined 59.3% due primarily to continued poor economics and reduction in flock sizes to meet new animal welfare guidelines. COST OF SALES Cost of sales increased $12.2 million, or 2.4%, from $498.3 million for the nine months ended September 30, 2001, to $510.5 million for the nine months ended September 30, 2002, due primarily to a $7.6 million increase in ingredient costs. Manufacturing and distribution expenses decreased $4.3 million from the prior-year period primarily as a result of lower energy costs due to a milder winter and plant closures. SELLING, GENERAL AND ADMINISTRATION EXPENSE Selling, general and administration expense decreased $21.0 million, or 19.8%, to $85.0 million for the nine months ended September 30, 2002, compared to $106.0 million for the nine months ended September 30, 2001. Expenses for the 2001 period included $1.0 million of costs related to the settlement of a product claim and $6.1 million of costs related to stock-based compensation on stock options under APB 25, expenses which were not recurring in the 2002 period. Additionally, the 2001 period included $10.4 million of additional intangible amortization expense over such amount for the 2002 period as a result of the revaluation of assets at the time of their acquisition and the adoption of SFAS No. 141. Other selling, general and administrative expenses decreased $3.5 million primarily as a result of reduced personnel costs achieved through the integration plan with Land O'Lakes Farmland Feed LLC. INTEREST EXPENSE As a result of the October 11, 2001 acquisition, all outstanding debt of the Company, exclusive of intercompany borrowings, was eliminated. Thus, for the nine months ended September 30, 2002, the Company incurred no interest expense, but rather received interest income of $0.9 million primarily due to the sale of receivables. For the nine-month period ended September 30, 2001, the Company incurred interest expense of $8.6 million on outstanding debt. INCOME TAX EXPENSE Since the Company is now a limited liability company, it does not incur any income tax expense at the company level. In contrast, for the nine months ended September 30, 2001, the Company recorded a tax expense of $2.3 million on its net earnings before taxes, after the elimination of non-deductible amortization on certain intangibles. 12 NET EARNINGS Net earnings increased $29.1 million to net earnings of $25.2 million for the nine months ended September 30, 2002, compared to a net loss of $3.9 million for the nine months ended September 30, 2001. Lower gross profit was more than offset by lower selling, general and administration expense, lower interest expense and the elimination of income tax expense. LIQUIDITY AND CAPITAL RESOURCES For the nine months ended September 30, 2002, net cash provided by operating activities was $28.8 million compared to net cash provided by operating activities of $26.2 million for the nine months ended September 30, 2001. Net cash used in investing activities was $5.5 million for the first nine months of 2002 compared to net cash used of $13.7 million for the nine-month period ended September 30, 2001. The decrease in net cash used is due primarily to fewer equipment purchases in the nine months ended September 30, 2002 versus the same period in 2001. Net cash used in financing activities of $32.2 million for the nine months ended September 30, 2002 represents repayments on the notes payable to Land O'Lakes, Inc. Net cash used in financing activities of $42.0 million for the nine months ending September 30, 2001 includes repayments on an outstanding term loan. At September 30, 2002, the Company had $5.5 million in cash and short-term investments. The Company operates with a relatively low working capital level because a majority of the sales are made on terms whereby customers receive a 3% discount if payment is received immediately upon shipment of feed products, and raw ingredients are normally purchased just prior to manufacturing and shipment. The Company expects that capital expenditures during fiscal year 2002 will be approximately $17.0 million. OFF-BALANCE SHEET ARRANGEMENTS Land O'Lakes, Inc., Land O'Lakes Farmland Feed LLC and Purina Mills, LLC entered into a revolving receivables securitization program with CoBank in December 2001 for up to $100 million in advances against eligible receivables. Under this program, these entities sell feed, seed and certain swine receivables to LOL Farmland Feed SPV, LLC, a limited purpose wholly-owned subsidiary of Land O'Lakes Farmland Feed LLC. This subsidiary is a qualifying special purpose entity (QSPE) under applicable accounting rules. The QSPE was established for the limited purpose of purchasing and obtaining financing for these receivables. The transfers of the receivables to the QSPE are structured as sales and, in accordance with applicable accounting rules, these receivables are not reflected in the consolidated balance sheets of Purina Mills, LLC, Land O'Lakes Farmland Feed LLC or Land O'Lakes, Inc. The QSPE purchases the receivables with a combination of cash initially received from CoBank, equal to the present value of eligible receivables times the agreed advance rate; and notes, equal to the unadvanced present value of the receivables. Land O'Lakes Farmland Feed LLC and the other receivables sellers are subject to credit risk related to the repayment of the QSPE notes, which, in turn, is dependent upon the ultimate collection on the QSPE's receivables pool. Accordingly, Land O'Lakes Farmland Feed has retained reserves for estimated losses. As of September 30, 2002, $35.0 million was drawn against this facility with $65.0 million available. In addition, the Company leases various equipment and real properties under long-term operating leases. Total consolidated rental expense for the third quarter of 2002 was $1.5 million, compared to $1.7 million in the third quarter of 2001. Total consolidated rental expense for the nine months ended September 30, 2002 was $4.9 million, compared to $5.6 million for the first nine months of 2001. Most of the leases require payment of operating expenses applicable to the leased assets. The Company expects that in the normal course of business most leases that expire will be renewed or replaced by other leases. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS At September 30, 2002, the Company had certain contractual obligations that require the following payments:

13 The Company has certain commitments which may require the following payments to be made: AMOUNT OF CONTINGENT OBLIGATIONS(1) EXPIRATION PER PERIOD (AS OF SEPTEMBER 30, 2002)

(1) See "Off-Balance Sheet Arrangements" for information concerning our receivables securitization. (2) These obligations are subject to mandatory prepayment in certain events. The Company expects that funds from operations and available borrowings under its revolving credit line from Land O'Lakes Farmland Feed LLC and receivables securitization facility will provide sufficient working capital to operate the business, to make expected capital expenditures and to meet foreseeable liquidity requirements. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." Major provisions of these statements are as follows: all business combinations must now use the purchase method of accounting, the pooling of interests method of accounting is now prohibited; intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as a part of a related contract, asset or liability; goodwill and intangible assets with indefinite lives are not amortized, but tested for impairment annually, except in certain circumstances, and whenever there is an impairment indicator; all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting. The Company adopted the provisions of SFAS 141 and certain provisions of SFAS 142 as of July 1, 2001, and the remaining provisions of SFAS 142 as of January 1, 2002. As required by SFAS 142, the Company performed step one of the impairment testing of goodwill by June 30, 2002. The fair value of goodwill exceeded the carrying amount, therefore the second step of impairment testing was not required and no impairment has been recognized in the current year of adoption. The Company will perform impairment tests annually and whenever events or circumstances occur indicating that goodwill or other intangible assets might be impaired. As of January 1, 2002, the Company is no longer amortizing goodwill, except for goodwill related to the acquisition of cooperatives and the formation of joint ventures.

FORWARD LOOKING STATEMENTS This Form 10-Q for the nine months ended September 30, 2002 includes "forward-looking statements" within the meaning of the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "could," "should," "seeks," "pro forma," "as adjusted," "anticipates," "intends," or other variations thereof, including their use in the negative, or by discussions of strategies, plans or intentions. Although we believe that our plans, intentions and expectations reflected in, or suggested by, such forward-looking statements are reasonable, you should be aware that actual results could differ materially from those projected by the forward-looking statements. For a discussion of factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements, see the discussion of risk factors set forth below. Because actual results may differ, readers are cautioned not to place undue reliance on forward-looking statements. We assume no obligation to update such forward-looking statements or to update the reasons that actual results could differ materially from those anticipated in such forward-looking statements. 14 RISK FACTORS CHANGES IN CONSUMER PREFERENCES COULD DECREASE OUR REVENUES AND CASH FLOW. We are subject to the risks of changing consumer preferences, which may result from a general economic downturn and nutritional and health-related concerns. Any shift in consumer preferences away from our products could decrease our revenues and cash flow and impair our ability to operate our business. Our business relies on the sale of feed products to consumers who own animals for recreational purposes or hobbies. The impact of an extended economic downturn in the United States economy could cause some of these owners either to sell their animals or to seek alternative, less expensive products. COMPETITION IN THE INDUSTRY MAY REDUCE OUR SALES AND MARGINS. Our business operates in a highly competitive environment. In addition, we compete with companies that have substantial capital resources, research and development staffs, facilities, diversity of product lines and brand recognition. Increased competition as to any of our products could result in reduced prices which would reduce our sales and margins. Our competitors may succeed in developing new or enhanced products which are better than ours. These companies may also prove to be more successful in marketing and selling their products than we are with ours. AN OVERSUPPLY OF FOOD PROTEINS IN THE UNITED STATES MARKET COULD CONTINUE TO REDUCE OUR NET SALES AND CASH FLOWS. Our animal feed segment supplies feed to farmers and specialized livestock producers for use in their commercial production of livestock. When the price that these producers receive for their livestock declines as a result of an oversupply of food proteins (such as beef cattle, swine and chicken) in the market, such producers may decide to lower their production levels or to seek alternative, lower margin products, resulting in lower net sales and cash flows for us. CHANGES IN OUR DISTRIBUTION CHANNELS COULD DECREASE OUR REVENUES AND CASH FLOW. We sell our products through various distribution channels. Increased turnover in any of these channels could result in a loss of distribution access to certain markets, resulting in lower sales and cash flows. OUR OPERATING RESULTS FLUCTUATE BY SEASON AND ARE AFFECTED BY EXTREME WEATHER CONDITIONS. Our operating results are affected by seasonal fluctuations of our sales and operating profits. Our sales are seasonal, with a higher percentage of sales generated during the fourth and first quarters of the year. This seasonality is driven largely by weather conditions affecting sales of our beef cattle products. If the weather is particularly warm during the winter, then sales of feed for beef cattle may decrease because the cattle may be better able to graze under warmer conditions. Live hog and wholesale pork prices are also affected by seasonal factors. Because of production times for hogs, there are generally fewer hogs available in the second quarter, causing live hog and wholesale pork prices to be higher at these times. Conversely, there are generally more hogs available in the fourth quarter, which generally causes live hog and wholesale pork prices to be lower on average during these months. In addition, severe weather conditions and natural disasters, such as floods, droughts, frosts or earthquakes, or adverse growing conditions, diseases and insect-infestation problems may reduce the quantity and quality of commodities available for processing by us. A significant reduction in the quantity or quality of commodities harvested or produced due to adverse weather conditions, disease, insect problems or other factors could result in increased processing costs and decreased production, with adverse financial consequences to us. INCREASED ENERGY AND GAS COSTS COULD INCREASE OUR EXPENSES AND REDUCE OUR PROFITABILITY. We require a substantial amount of electricity, natural gas and gasoline to manufacture, store and transport our products. The prices of electricity, natural gas and gasoline fluctuate significantly over time. Many of our products compete based on price and we may not be able to pass on increased costs of production, storage or transportation to our customers. As a result, increases in the cost of electricity, natural gas or gasoline could substantially harm our business and results of operations. 15 OUTBREAKS OF DISEASE CAN REDUCE OUR NET SALES AND OPERATING MARGINS. The productivity and profitability of our businesses depend on animal health and on disease control. We face the risk of outbreaks of mad cow disease, which could lead to the destruction of beef cattle and dairy cows and decreased demand for dairy and beef products. If this occurs, we could have decreased demand for our feed products as dairy and beef producers decrease their herd sizes due to decreased demand for dairy and beef products. We face the risk of outbreaks of foot-and-mouth disease, which could lead to a massive destruction of cloven-hoofed animals such as dairy cattle, beef cattle, swine, sheep and goats and significantly reduce the demand for meat products. Because foot-and-mouth disease is highly contagious and destructive to susceptible livestock, any outbreak of foot-and-mouth disease could result in the widespread destruction of potentially all infected livestock. Our operations could suffer as a result of decreased demand for feed products. In addition, we may be prevented from selling or transporting hogs. CHANGES IN THE MARKET PRICES OF THE DAIRY AND AGRICULTURAL COMMODITIES THAT WE USE AS INPUTS AS WELL AS THE PRODUCTS WE MARKET MAY CAUSE OUR OPERATING PROFIT TO DECREASE. Many of our products use agricultural commodities as inputs or constitute agricultural commodity outputs. Consequently, increased cost of commodity inputs and decreased market price of commodity outputs may reduce our operating profit. We follow industry standards for feed pricing. The feed industry generally prices products on the basis of income over ingredient cost ("IOIC") per ton of feed. This practice mitigates the impact of volatility in commodity ingredient markets on our margins. However, if our commodity input prices were to increase dramatically, we may be unable to pass these prices on to our customers, who may find alternative feed sources at lower prices or may exit the market entirely. This increased expense could reduce our profitability. We have ownership interests in swine. In recent years, the market for hogs and wholesale pork has been the subject of extreme market fluctuations as a result of a number of factors, including industry expansion, processor capacity and consumer demand. In December 1998, the price of hogs hit its lowest point in nearly forty years, resulting in the price we received for a finished hog being substantially less than the cost to produce the hog. The prices for weanling and feeder pigs also decreased dramatically. A large portion of these losses were attributable to contracts provisions which guarantee swine producers certain minimum prices for feeder pigs. Although we do not intend to renew or extend these contracts, we may continue to incur losses under these contracts until the last ones expire in 2004. WE OPERATE THROUGH JOINT VENTURES IN WHICH OUR RIGHTS TO EARNINGS AND TO CONTROL THE JOINT VENTURE ARE LIMITED. We produce, market and sell products through numerous joint ventures with unaffiliated third parties. The terms of each joint venture are different, but our joint venture agreements generally contain: - restrictions on our ability to transfer our ownership interest in the joint venture; - no right to receive distributions without the unanimous consent of the members of the joint venture; and - non-competition arrangements restricting our ability to engage independently in the same line of business as the joint venture. In addition to these restrictions, in connection with the formation of some of our joint ventures, we have entered into purchase or supply agreements which require us to purchase a minimum amount of the products produced by the joint venture or supply a minimum amount of the raw materials used by the joint venture. The day-to-day operations of some of our joint ventures are managed by us through a management contract and others are managed by other joint venture members. As a result, we do not have day-to-day control over certain of these companies. OUR OPERATIONS ARE SUBJECT TO NUMEROUS LAWS AND REGULATIONS, EXPOSING US TO POTENTIAL CLAIMS AND COMPLIANCE COSTS THAT COULD ADVERSELY AFFECT OUR BUSINESS. We are subject to Federal, state and local laws and regulations relating to the manufacturing, labeling, packaging, health and safety, sanitation, quality control, fair trade practices, and other aspects of our business. In addition, zoning, construction and operating permits are required from governmental agencies which focus on issues such as land use, environmental protection, waste 16 management, and the movement of animals across state lines. These laws and regulations may, in certain instances, affect our ability to develop and market new products and to utilize technological innovations in our business. In addition, changes in these rules might increase the cost of operating our facilities or conducting our business which would adversely affect our finances. As a manufacturer of animal feed products, we are subject to the Federal Food, Drug and Cosmetic Act and regulations issued thereunder by the Food and Drug Administration ("FDA"). Several states also have laws that protect feed distributors or restrict the ability of corporations to engage in farming activities. These regulations may require us to alter or restrict our operations or cause us to incur additional costs in order to comply with the regulations. INABILITY TO PROTECT OUR TRADEMARKS AND OTHER PROPRIETARY RIGHTS COULD DAMAGE OUR COMPETITIVE POSITION. We rely on patents, copyrights, trademarks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect our intellectual property. Any infringement or misappropriation of our intellectual property could damage its value and could limit our ability to compete. We may have to engage in litigation to protect our rights to our intellectual property, which could result in significant litigation costs and require a significant amount of management's time. We have invested substantial resources promoting and developing our trademarked brands and establishing their reputation as high-quality products. Actions taken by these parties may damage our reputation and our trademarks' value. We license the trademarks Purina, Chow and the "Checkerboard" Nine Square Logo under a perpetual, royalty-free license from Nestle Purina PetCare Company. Under the terms of the license agreement, Nestle Purina PetCare Company retains primary responsibility for protecting the licensed trademarks from infringement. If Nestle Purina PetCare Company fails to assert its rights to the licensed trademarks, we may be unable to stop such infringement or cause them to do so. Any such infringement of the licensed trademarks, or of similar trademarks of Nestle Purina PetCare Company, could result in a dilution in the value of the licensed trademarks. OUR BRAND NAMES COULD BE CONFUSED WITH NAMES OF OTHER COMPANIES WHO, BY THEIR ACT OR OMISSION, COULD ADVERSELY AFFECT THE VALUE OF OUR BRAND NAMES. Our products are generally marketed under the trademarks Purina, Chow and the "Checkerboard" Nine Square Logo under a perpetual, royalty-free license from Nestle Purina PetCare Company. Nestle Purina PetCare Company markets widely recognized products under the same trademarks and has given other unaffiliated companies the right to market products under these trademarks. A competitor of ours, Cargill, licenses from Nestle Purina PetCare Company the right to market the same types of products which we sell under these trademarks in countries other than the United States. Acts or omissions by Nestle Purina PetCare Company or other unaffiliated companies may adversely affect the value of the Purina, Chow and the "Checkerboard" Nine Square Logo trademarks and the demand for our products. Third-party announcements or rumors about these unaffiliated companies could also have these negative effects. PRODUCT LIABILITY CLAIMS OR PRODUCT RECALLS COULD ADVERSELY AFFECT OUR BUSINESS REPUTATION AND EXPOSE US TO INCREASED SCRUTINY BY FEDERAL AND STATE REGULATORS. The sale of animal feed products involves the risk of injury to those animals as well as human consumers of those animals. Such hazards could result from: - tampering by unauthorized third parties; - product contamination (such as listeria, E. coli. and salmonella) or spoilage; - the presence of foreign objects, substances, chemicals, and other agents; - residues introduced during the growing, storage, handling or transportation phases; or - improperly formulated products which either do not contain the proper mixture of ingredients or which otherwise do not have the proper attributes. Some of the products we sell are produced for us by third parties, or contain inputs manufactured by third parties, and such third parties may not have adequate quality control standards to assure that such products are not adulterated, misbranded, contaminated or otherwise defective. We may be subject to claims made by consumers as a result of products manufactured by these third parties which are marketed under our brand names. 17 Consumption of our products may cause serious health-related illnesses and we may be subject to claims or lawsuits relating to such matters. Even an inadvertent shipment of adulterated products is a violation of law and may lead to an increased risk of exposure to product liability claims, product recalls and increased scrutiny by federal and state regulatory agencies. Such claims or liabilities may not be covered by our insurance or by any rights of indemnity or contribution which we may have against others in the case of products which are produced by third parties. In addition, even if a product liability claim is not successful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could have a material adverse effect on our reputation with existing and potential customers and on our brand image. In the past, we have voluntarily recalled certain of our products in response to reported or suspected contamination. If we determine to recall any of our products, we may face material consumer claims. OUR BUSINESS IS SUBJECT TO THE RISK OF ENVIRONMENTAL LIABILITY AND WE COULD BE NAMED AS A RESPONSIBLE OR POTENTIALLY RESPONSIBLE PARTY. Many of our current and former facilities have been in operation for many years and, over that time, we and other operators of those facilities have generated, used, stored, or disposed of substances or wastes that are or might be considered hazardous under applicable environmental laws, including chemicals and fuel stored in underground and above-ground tanks, animal wastes and large volumes of wastewater discharges. As a result, the soil and groundwater at or under certain of our current and former facilities may have been contaminated, and we may be required to make material expenditures to investigate, control and remediate such contamination. In addition, federal and state environmental authorities have proposed new regulations and attempted to apply certain existing regulations for the first time to agricultural operations. These regulations could result in significant restraints on some of our operations, particularly our swine operations, and could require us to spend significant amounts of money to bring these operations into compliance. STRIKES OR WORK STOPPAGES BY OUR UNIONIZED WORKERS COULD DISRUPT OUR BUSINESS. At September 30, 2002, approximately 13% of our employees were covered by collective bargaining agreements, some of which are due to expire within the year. Our inability to negotiate acceptable contracts with the unions upon expiration of these contracts could result in strikes or work stoppages and increased operating costs as a result of higher wages or benefits paid to union members or replacement workers. If the unionized workers were to engage in a strike or work stoppage, or other non-unionized operations were to become unionized, we could experience a significant disruption of our operations or higher ongoing labor costs. THERE IS NO ASSURANCE THAT OUR SENIOR MANAGEMENT TEAM OR OTHER KEY EMPLOYEES WILL REMAIN WITH US. We believe that our ability to successfully implement our business strategy and to operate profitably depends on the continued employment of our senior management team and other key employees. If members of the management team or other key employees become unable or unwilling to continue in their present positions, the operation of our business would be disrupted and we may not be able to replace their skills and leadership in a timely manner to continue our operations as currently anticipated. We operate generally without employment agreements with, or key person life insurance on the lives of, our key personnel. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK COMMODITY RISK In the ordinary course of business, we are subject to market risk resulting from changes in commodity prices associated with agricultural markets. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation". To manage the potential negative impact of price fluctuations, we engage in various hedging and other risk management activities. As part of our trading activity, we utilize futures and option contracts offered through regulated commodity exchanges to reduce risk on the market value of our inventories and our fixed or partially fixed purchase and sale contracts. We do not utilize hedging instruments for speculative purposes. Certain commodities cannot be hedged with futures or option contracts because such contracts are not offered for these commodities by regulated commodity exchanges. Inventories and purchase contracts for those commodities are hedged with forward 18 sales contracts to the extent practical so as to arrive at a net commodity position within the formal position limits set by us and deemed prudent for each of those commodities. Commodities for which future contracts and options are available are also typically hedged first in this manner, with futures and options used to hedge within position limits that portion not covered by forward contracts. The notional or contractual amount of futures contracts provides an indication of the extent of our involvement in such instruments for the dates and the periods provided below, but does not represent exposure to market risk or future cash requirements under certain of these instruments. A summary of our futures contracts follows:

INFLATION RISK Inflation is not expected to have a significant impact on our business, financial condition or results of operations. We generally have been able to offset the impact of inflation through a combination of productivity improvements and price increases. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. The Company's Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in rule 13a-14(c) under the Exchange Act) as of a date (the "Evaluation Date") within 90 days prior to the filing date of this quarterly report on Form 10-Q. Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in timely alerting them to the material information relating to us (or our consolidated subsidiaries) required to be included in our periodic SEC filings. (b) Changes in internal controls. There were no significant changes made in our internal controls during the period covered by this report or in other factors that could significantly affect these controls subsequent to the date of their evaluation and there were no corrective actions with regard to significant deficiencies and material weaknesses. 19 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS

(1) Incorporated by reference to exhibit 3.60 to the Land O'Lakes, Inc. Registration Statement on Form S-4 filed March 18, 2002 (Registration No. 333-84486). (2) Incorporated by reference to exhibit 3.61 to the Land O'Lakes, Inc. Registration Statement on Form S-4 filed March 18, 2002 (Registration No. 333-84486). (3) Incorporated by reference to the identical exhibit to the Company's Registration Statement on Form S-4 filed March 18, 2002. (Registered No. 333-84486). (b) REPORTS ON FORM 8-K There were no reports filed on Form 8-K for Purina Mills, LLC for the three months ended September 30, 2002. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Arden Hills, State of Minnesota, on the 14th day of November, 2002. PURINA MILLS, LLC By /s/ DANIEL KNUTSON ----------------------------------------------- Daniel Knutson Chief Financial Officer (Principal Financial and Accounting Officer) 21 CERTIFICATIONS I, Robert DeGregorio, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Purina Mills, LLC; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 By /s/ Robert DeGregorio --------------------------------- Robert DeGregorio President and Manager 22 I, Daniel Knutson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Purina Mills, LLC; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): d) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and e) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 By /s/ Daniel Knutson --------------------------------- Daniel Knutson Senior Vice President and Chief Financial Officer 23

PURINA MILLS LLC 10-Q